Of Falling Real Estate Prices, Dr Arvind Panagariya and the Art of Continuing to Suck Up

Nov 13, 2017

Dr Arvind Panagariya, the former vice-chairman of the Niti Aayog, today in a column titled Demonetisation: Evaluating the Critics, in the Business Standard, writes: "The second avenue through which demonetisation has directly expunged unaccounted wealth is real estate...Unsurprisingly, an attack on unaccounted cash struck at the heart of this black wealth by cutting real estate prices by a quarter."

There are multiple questions that this statement raises:

1) What is the source for this data? This isn't exactly a conversation between two property dealers, or two prospective real estate buyers, who can quote any offhand numbers, while having a conversation. This is a statement being made by someone who was at the top of an economic institution run by the Indian government. This is a statement by an economist working in a top university in the United States.

Also, if real estate prices have fallen by 25 per cent after demonetisation, why isn't this visible in official data sources. Take the case of Reserve Bank of India's All India House Price Index, which has been plotted as Figure 1.

Figure 1:

Figure 1 clearly shows that housing prices across the country have been on their way up. There has "clearly" been no dip, as Dr Panagariya claims. How do things look if we plot one-year return instead of index values? Let's take a look at Figure 2, which does that.

Figure 2:

Figure 2 tells us clearly that the one-year return in real estate has been falling over the last six and a half years. This trend started much before demonetisation took place. Also, how have the returns been post demonetisation? Between the end of December 2016 and June 2017 (the latest data available), real estate prices as per the All India House Price Index have gone up by 4.3 per cent. The returns between September 2016 and June 2017, have been 6.9 per cent.

Other than RBI's All India House Price Index, there is NHB's Residex. As of now this index has data only up to March 2017. And the one year median return between March 2016 and March 2017, as per this index, across 49 cities, was 2.8 per cent. This is very low. But where is the 25 per cent fall that Dr Panagariya has written about?

2) For a moment let's assume that Dr Panagariya is right and real estate prices have fallen by 25 per cent. If real estate price all across the country have fallen by 25 per cent on an average, then there will be cities/town/localities where the price has fallen by more than 25 per cent. Which are these places? Can Dr Panagariya provide us with a list? This would make for a super investment right now.

Let's say there is this town where real estate prices have fallen by 50 per cent post demonetisation. It is worth remembering that a 50 per cent loss wipes off a 100 per gain. (If the price of an asset moves from Rs 50 to Rs 100 that makes for a 100 per cent gain. When it falls back to Rs 50 that is a 50 per cent loss). If there exists such a town, it would make for a great real estate investment right now. Can Dr Panagariya provide us with names of a few such places?

3) Also, if prices have fallen by 25 per cent, why are real estate transactions not happening? Why has the total number of unsold homes of real estate companies, only continued to grow? It is worth remembering here that a 25 per cent fall within a time period of a year, is a huge fall. Falls like these in case of real estate, only happen once in a few decades. And if something like this has happened, as Dr Panagariya claims, then why aren't people buying? Interest rates on home loans have also fallen post demonetisation.

Take a look at Figure 3. It plots the growth in home loans outstanding with banks.

Figure 3:

Figure 3 clearly shows that the growth in home loans outstanding has fallen post demonetisation. What this means is that people are not buying as many homes as they were in the past. If prices have fallen by 25 per cent post demonetisation, people would have bought homes and the curve in Figure 3 would slope upwards i.e. people would take on more and more home loans to buy homes.

4) Further, if real estate prices have fallen by 25 per cent, as claimed by Dr Panagariya, it is time that the state governments cut the ready reckoner rates on which stamp duty needs to be paid, by a similar proportion. This should be fairly easy given that BJP governments govern most of the big states across India and a direction from the PMO should be suffice to get them to do the needful. But nothing of that sort has happened. Why hasn't this been done till date, is a question that only Dr Panagariya can answer.

5) To conclude, it is safe to say that Dr Panagariya has just made up this data, in order to justify demonetisation. It's a sad day today, when an Indian economist, working in one of the best American universities has had to fudge data in order to please his former political bosses.

The irony is that Dr Panagariya is no longer a part of the government. And he doesn't really need to say things which do not hold up against data, unless, he is looking for another stint with the Modi government. That changes things.

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According to dr Arvind Panagariya without demonetisation the real estate prices would have increased by another 25% over this period.Because of demonitisation prices are staying at where it were before Nov 2016.

A very sharp and pointed challenge to one of the the key supporting argument proposed by the government.

However, on the letter dated 10 May 2017,"The State of Real Estate Post Demonetisation: Falling Prices, Desperate Builders and the Return of Black Money" you seem to suggest prices are indeed falling. Aren't they contradictory?

Also, this Rediff article - "Demo impact: Real estate prices are dropping and how!" quotes a report by a Real Estate focused Data Analytics agency PropEquity, which apparently says that prices have fallen. Would be interesting to dig deeper into this.

Dear Vivek, I had promised to myself I shall not react to your political diatribes, for, for the last several months I find you fancy yourself as much more of a political analyst than an economist. This explains your obsession with repeatedly running down people rather than issues. Like any citizen of India you have every right to have political views and preferences but to trade them under the garb of an expert economist would be professionally unethical to your readers. But when it gets excessive, sometimes I end up breaking my promise to myself.Am not sure you recall I have written earlier also that when I started reading you a few years ago courtesy Equitymaster, I was highly impressed with your ability to explain economic events logically & in simple language and sometimes still do. In fact I recommended your articles to many in my circle. The kind of dispassionate analyses you are capable of and the relevant data you cull for that should be a lesson for some of the celebrity economists. But ever since your articles took political undertones, focused on lampooning individuals instead of issues, I rarely read your articles now.May be Arvind Panagriya is right, maybe he is not. But why obsess with proving him wrong? You have written extensively on real estate and some of it is very enlightening. But you know better than anyone else your analysis in this article uses data which is unlikely to be accurate for the simple reason of black money factor not reflecting in that. Please be constructive if you care for the nation. I always tell myself I owe my loyalty to the nation, not to a political party or leader. So I shall support or oppose issues rather than personalities. So if a government is reasonably efficient & sincere, I would take the rough with the smooth unless it's something egregious.You are much better than the cacophonous media, and hence I expect a constructive approach from you. And anyway would we want Congress, or the Left, or the Lalus & Mulayams of the nation to govern us?

Incorrect data /fudged data is the order of the day.Government servants will on most occasions blindly tom- tom their masters voices, that has to be done by most of them , as only then will they rise the ladder and get plum postings.I am no economist by any standard,however if one were to take real estate prices for let us say the last 25-30 years pan India, or let us say Cochin ( I live here).I can bravely say prices have gone up only upwards. In our country ,where our population is steadily rising and land is limited, prices will go up as land is limited and demand for this limited land can only go up, taking into consideration the demand and supply concept in economics. Temporary lulls/ setbacks in land prices are seen in areas where land prices may have spiralled upward in a very short span of time,however after some time,post correction, the prices again only go up.

Dear Vivek,I do enjoy your logical assessments on most matters, but here you are dishonest in contesting the fact that "demonetisation has impacted well by reducing the role of Black money in Housing prices". All the graphs you show are based on the "White money" transactions, the data is not covering the use of "Black- Cash" part of the transaction. So please do not mislead us. The common man who has noticed the reality on the ground is aware of the true impact. Yes, DEMONETISATION has reduced the value of properties by a huge percentage. There are not many transactions as sellers are holding on. The "minimum value" by law does not need to decrease as that was never correctly worked out. Request your corrected view on this.

I am not an expert on real estate. My information is based on hearsay.Since demonetization, percentage of black payment has come down and white gone up. All the RBI data will be based on white payment only.If we consider this, it is possible that net prices in some area have fallen more than 10%.

absolutely right. How the so called scholars can justify this with data which has no authentication. It is just like painted sub-grade food that we are buying from the market. Now people will loose the interest in reading articles.

Sir,Makes interesting reading. A doubt that nags me is if post demonetisation, the housing prices have gone up, is it due to the shortage of cash and purchases being made for full value as against most purchases being partly by cash earlier? As a layman I ask this question for more clarity.

Economists like Dr. Arvind Panagariya need to put their thought processes in order, as explained in the my article published almost 3 years ago'Can Physics help rethink Economics?'(Presidency University Reunion Souvenir Dec'2014)

Real estate sector is totally controlled by builders in concert with politicians. Also, the middle man or brokers calling themselves as agents, play a huge role in not allowing prices to come down despite falling demand. Prices of real estate in all major cities and tier two cities is beyond the reach of common man. Housing is a necessity like food and clothing but, people with black money corner it for selling at profit. The authorities must not allow speculation. They should restrict an individual from buying more than one house.

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